The House passed the bill that averts the Fiscal Cliff. It looks like the market thinks it was a good thing, but I still am not sure. As David Brooks noted in the column I cited yesterday, no hard decisions have been made. We continue to put off any decisions about problems we know are there, namely, the unsustainability of our entitlement programs with current taxes and spending. President Obama has said that he will not negotiate when the debt limit ceiling is reached, so he has no plans for any serious reductions in spending.
President Obama considers himself a progressive. If we want to know what progressives want, there is no better place than the New York Times. John Cochrane parses a recent New York Times editoria in his blog. The editorial calls for tax reform but does not mean tax reform in a serious way. Instead, it is increasing taxes on higher incomes and redistributing it to others. Cochrane's analysis is worth reading.
An op-ed in yesterday's Times by Russ Douthat illustrates further, although it is a little more realistic than the editorial Cochrane discusses. He states that for progressives, the government needs to increase revenues because cutting spending is not "progressive." But, he acknowledges that the entitlement programs are not sustainable. He sees the agreement on the fiscal cliff as negative in the sense that so many Democrats were willing to raise the lower bound on the increase in taxes to $400,000. He argues that the Republicans approach to sustainability is to cut benefits but the programs are popular so that won't happen. If Democrats are unwilling to broaden the tax base, then the Democratic approach is also not sustainable.
Based on these two examples--Douthat and the editorial--the progressive program offers nothing on how to expand the pie, i.e., nothing on growth.
Showing posts with label fiscal cliff. Show all posts
Showing posts with label fiscal cliff. Show all posts
Wednesday, January 2, 2013
Monday, December 31, 2012
On the Eve of the Fiscal Cliff
It is New Year's Eve and still no resolution to the fiscal cliff. I had thought there would be a resolution but it seems unlikely now. As I have written before, I don't think it will be a cliff since things will change slowly and Congress can still act in January to change things. The extent to which one views the changes tomorrow as a cliff depends on how Keynesian one is. Since I am not a Keynesian, I don't see it as dramatic as many others do. John Cochrane has a post on his blog that puts the cliff in perspective. He calls it a molehill. As he notes, the key question involves incentives and we have to look much more broadly at things than just the tax rates in the tax code.
The fiscal cliff can lead to positive things if President Obama and Congress use the next couple of months to work out a long-term solution to the budget deficits that includes true tax reform, i.e., a tax structure that raises revenue in line with needed spending, that minimizes disincentives for work and investment, and eliminates most of the portions of the budget and tax codes that engage in industrial planning.
Greg Mankiw's article in the New York Times yesterday pointed out some basic facts that both political parties tend to ignore. Any long-term solution to budget deficits requires that the middle class pay substantial taxes. Alternatively, cuts in entitlements have to be large and our entitlement programs basically are for the middle classes.
New Year's Eve is supposed to be a time of optimism--hopes for the new year. Fortunately, as people we can have a good year even if the macroeconomy is not great. Life consists in more than wealth and consumption goods. I prefer to rely on God's grace than on my 401k plans or on social security.
The fiscal cliff can lead to positive things if President Obama and Congress use the next couple of months to work out a long-term solution to the budget deficits that includes true tax reform, i.e., a tax structure that raises revenue in line with needed spending, that minimizes disincentives for work and investment, and eliminates most of the portions of the budget and tax codes that engage in industrial planning.
Greg Mankiw's article in the New York Times yesterday pointed out some basic facts that both political parties tend to ignore. Any long-term solution to budget deficits requires that the middle class pay substantial taxes. Alternatively, cuts in entitlements have to be large and our entitlement programs basically are for the middle classes.
New Year's Eve is supposed to be a time of optimism--hopes for the new year. Fortunately, as people we can have a good year even if the macroeconomy is not great. Life consists in more than wealth and consumption goods. I prefer to rely on God's grace than on my 401k plans or on social security.
Saturday, December 29, 2012
Countdown to the Fiscal Cliff
As January 1 approaches so does the fiscal cliff. A couple of days ago, I was sure that the government would not come to an agreement. Now, things look slightly better. Negotiations are now going on in the Senate to come up with a compromise. If it passes the Senate, Speaker Boehner has said he will bring it to a vote in the House. Perhaps some congressmen will not want to go on record as voting against a package to a vert the fiscal cliff. Of course, there are Tea Party Republicans who want to be on record as voting against an increase in taxes. So, I don't think the odds are high that a deal will be found.
As I have written before, I am not convinced that going over the cliff will be that negative since a bill can be passed in the new congress to avert much of the impact. It could also be retroactive to Jan. 1. The fact that many will gladly vote for a tax reduction after Jan. 1 means that most of the Bush tax cuts would be reinstated. Ultimately, I don't see anything happening that will address the long-term problems. The short-term mentality still prevails in Washington and, unfortunately, on Main Street.
As I have written before, I am not convinced that going over the cliff will be that negative since a bill can be passed in the new congress to avert much of the impact. It could also be retroactive to Jan. 1. The fact that many will gladly vote for a tax reduction after Jan. 1 means that most of the Bush tax cuts would be reinstated. Ultimately, I don't see anything happening that will address the long-term problems. The short-term mentality still prevails in Washington and, unfortunately, on Main Street.
Monday, December 24, 2012
On the Fiscal Cliff and the Long Term
So far there is no resolution to the fiscal cliff. Perhaps we will go over it. In the long run, I don't think it much matters if we do or not. If we go over, I am sure that there will be legislation proposed to cut taxes on all except the top 2 percent. I posted several days ago about an article in the St. Louis Fed Review about the increase in the deficit since the early 1970s. We have also known since before then that the "Baby Boom" generation was a phenomenon that impacted things when they hit certain ages--the need to build more schools when boomers reached school age, expansion of colleges and universities when boomers hit college age, more houses as boomers began family formation, and so on. In the same way, we have known that boomers would impact social security and medicare when they hit retirement age.
If we look at voting in this country since the early 1970s, we can say that the people have wanted more from the government but have not wanted to pay for all of it. Whenever any politician has broached the subject of social security or medicare reform, he or she has been slapped down by voters. Social security taxes do not go into funds set aside for the persons, but are used to pay social security benefits of current retirees. Instead of having boomers pay more on the grounds that they ultimately will collect more, we end up forcing younger generations to bear more of the burden. The alternative is to reduce benefits to some extent. The debt levels will not fall significantly by only making cuts in discretionary spending unless taxes rise substantially.
The fiscal cliff provided an opportunity for serious thought and discussion about the long term if that discussion had begun early in 2012. There is not enough time between Christmas and New Years for such a conversation to occur. The track record of the Congresses and the presidents we have had is settle for short-term patches and not to tackle the longer term issues such as the unsustainability of the entitlement programs as they exist today. But, I have come to realize that the Congresses and presidents we have had merely provided what the electorate wants. We want more but we don't want to pay for it. But who do we get the "more" from? Many years ago my father suggested that a law should be passed that said that any future laws had to substitute the term "taxpayers" for government, as in "the taxpayers will provide the funds for defense, or for building highways, or for medicaid payments." I don't know if it would make a difference but it might be worth a try.
If we look at voting in this country since the early 1970s, we can say that the people have wanted more from the government but have not wanted to pay for all of it. Whenever any politician has broached the subject of social security or medicare reform, he or she has been slapped down by voters. Social security taxes do not go into funds set aside for the persons, but are used to pay social security benefits of current retirees. Instead of having boomers pay more on the grounds that they ultimately will collect more, we end up forcing younger generations to bear more of the burden. The alternative is to reduce benefits to some extent. The debt levels will not fall significantly by only making cuts in discretionary spending unless taxes rise substantially.
The fiscal cliff provided an opportunity for serious thought and discussion about the long term if that discussion had begun early in 2012. There is not enough time between Christmas and New Years for such a conversation to occur. The track record of the Congresses and the presidents we have had is settle for short-term patches and not to tackle the longer term issues such as the unsustainability of the entitlement programs as they exist today. But, I have come to realize that the Congresses and presidents we have had merely provided what the electorate wants. We want more but we don't want to pay for it. But who do we get the "more" from? Many years ago my father suggested that a law should be passed that said that any future laws had to substitute the term "taxpayers" for government, as in "the taxpayers will provide the funds for defense, or for building highways, or for medicaid payments." I don't know if it would make a difference but it might be worth a try.
Friday, December 7, 2012
The Fiscal...Cliff...Slope,,,Curb?
The Fiscal Cliff is all they talk about on some of the business channels now, at least by my infrequent watching of the channels. Fiscal policy involves government expenditures and taxes, and both are will be impacted in early January unless Congress and the president come to an agreement about how to change things. On January 1, the Bush tax cuts will expire so rates will return to those that prevailed in 2000. The lowest rate will increase from 10 to 15 percent, the next from 15 to 25 percent, and the remaining by smaller amounts--mostly by 3 percentage points. Other tax changes would also take place such as increased in capital gains and taxes on dividends, and a return to the criteria for the Alternative Minimum Tax that prevailed in 2000. According to the non-partisan Tax Foundation, the increased taxes collected would be $514 billion.
Government spending will also be cut. The law has federal government expenditures falling by $110 billion, divided evenly between defense spending and discretionary non-defense spending, i.e., exclusing Social Security, Medicare, federal pensions and federal salaries. So, both the tax increases and the cuts in government spending are considered contractionary policies, which most economists would consider unwise in a weak economy.
A simplistic way of looking at the effects would be to take the components of GDP and see the impact. In the third quarter of 2012, we had: C = $11,149.4 billion, I = $2080.4 billion, G = $3090.1 billion, and net exports = -$522.9 billion. This gives a GDP of $15,797.4 billion. THe fall in G of $110 billioin reduces government spending to $2908.1 billion, which would lower GDP by 0.7%. Assuming the tax changes lead to reductions in consumption spending, we would have C=$10,35.8 and end up with a reduction of GDP of 3.9%. If spread over a couple of quarters, we would have a recession.
Some argue that the "cliff" is really a "slope" because the changes will occur slowly over the year. People will see lower take-home pay in each paycheck. So, if the new Congress acts, the effects would be minimal. But since the major players politically are the same as we now have, it is difficult to see how a new Congress will so different from the status quo.
There are also some who argue we should go over the cliff. For example, Howard Dean, the former chair of the Democratic National Committee argues "progressives" should want to go over the cliff because it will generate greater tax revenue to fund programs with. The tax increases are about five times more than the spending cuts.
Two other issues worth considering. First, most estimates of government multipliers from before the recent recession were that the multiplier on tax changes was greater than the multiplier on expenditure changes, and permanent changes have much bigger impacts than temporary changes. If so, then the contractionary effects of the tax increases will be much greater than the effects of the spending cuts. Second, tax changes also affect incentives, which would also be a drag on the economy.
On the other hand, if one is not a Keynesian, should one think the effects in the long run may actually be positive?
Government spending will also be cut. The law has federal government expenditures falling by $110 billion, divided evenly between defense spending and discretionary non-defense spending, i.e., exclusing Social Security, Medicare, federal pensions and federal salaries. So, both the tax increases and the cuts in government spending are considered contractionary policies, which most economists would consider unwise in a weak economy.
A simplistic way of looking at the effects would be to take the components of GDP and see the impact. In the third quarter of 2012, we had: C = $11,149.4 billion, I = $2080.4 billion, G = $3090.1 billion, and net exports = -$522.9 billion. This gives a GDP of $15,797.4 billion. THe fall in G of $110 billioin reduces government spending to $2908.1 billion, which would lower GDP by 0.7%. Assuming the tax changes lead to reductions in consumption spending, we would have C=$10,35.8 and end up with a reduction of GDP of 3.9%. If spread over a couple of quarters, we would have a recession.
Some argue that the "cliff" is really a "slope" because the changes will occur slowly over the year. People will see lower take-home pay in each paycheck. So, if the new Congress acts, the effects would be minimal. But since the major players politically are the same as we now have, it is difficult to see how a new Congress will so different from the status quo.
There are also some who argue we should go over the cliff. For example, Howard Dean, the former chair of the Democratic National Committee argues "progressives" should want to go over the cliff because it will generate greater tax revenue to fund programs with. The tax increases are about five times more than the spending cuts.
Two other issues worth considering. First, most estimates of government multipliers from before the recent recession were that the multiplier on tax changes was greater than the multiplier on expenditure changes, and permanent changes have much bigger impacts than temporary changes. If so, then the contractionary effects of the tax increases will be much greater than the effects of the spending cuts. Second, tax changes also affect incentives, which would also be a drag on the economy.
On the other hand, if one is not a Keynesian, should one think the effects in the long run may actually be positive?
Thursday, November 1, 2012
Three Noteworthy Pieces in Today's Journal
Three interesting articles and op-ed pieces in today's WSJ. The first article is by David Wessel and provides background for the fiscal cliff and budget talks. There is also a video that can be seen that is interestings. There is also an op-ed piece on global climate change and Hurricane Sandy. It points out that in many ways we have fewer hurricanes and less-destructive hurricanes than in years past. The third is an op-ed piece by Alan Blinder. He argues that the recovery has been slow but steady and that to have expected better is to have been mistaken. I have a couple of quibbles with Blinder's piece though. First, he is pretty much a standard Keynesian and emphasizes government spending more than I think is appropriate. But another is more political. He mentions the Simpson-Bowles plan, noting that Pres. Obama did not embrace it but neither did Paul Ryan. The difference is that the commission was appointed by Pres. Obama and he failed to endorse or support the recommendations. The plan just fell flat. As president, he should have been providing leadership on the issue but failed to do so. To equate Ryan's no-vote with Obama's lack of support and leadership is misguided.
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